Venture takes gamble on Nasdaq

Just a few years ago, the lone taxi stand at Macau’s ferry terminal was nearly always crammed with visitors from Hong Kong. Their destination: the famed Casino Lisboa, the island’s flagship casino run by gaming magnate Stanley Ho Hung-sun.

Today, visitors, now including scores of mainlanders, have a choice of shiny, new Vegas-style casinos that have recently opened, two of which are expected to benefit from a Nasdaq initial public offering this week.

For four decades, Ho held a tight grip in the casino market in Macau, until the government broke open the monopoly in 2001. Now, just six lucky players hold the gaming concessions required to operate casinos in Macau.

Legendary Vegas casino kings Sheldon Adelson and Steve Wynn were the first to make a grab for one. Las Vegas Sands opened the first Vegas- style casino in 2005, followed by rival Wynn Resorts, which just opened the doors to a classy casino near the now- dingy Lisboa. Other entrants in the Macau space include Hong Kong-listed Galaxy Entertainment Group (0027) and Melco International Development (0200).

Melco and its joint venture partner, Australia’s Publishing and Broadcasting Ltd, which is building two massive Macau casinos, are gearing up to sell up to USD 1 billion (HKD 7.8 billion) worth of American depositary shares on Nasdaq this week.

The IPO is going to market at a time when Macau gaming stocks are demanding top dollar. Melco has jumped 250 percent since year-end 2005; Galaxy is up 80 percent; Wynn has risen 75 percent; and Las Vegas Sands has more than doubled in the past 12 months.

The gains reflect investor fever for the red-hot market in Macau, the only place in China where Vegas-style casino gambling is legal.

The Melco PBL listing will be the first pure Macau gaming play listed in the United States.

The joint venture also owns a chain of slot-machine cafes, called Mocha Slot Clubs.

Post-listing, the joint venture Melco PBL Entertainment must compete for investor attention with rivals Wynn and LV Sands, the only US-listed stocks with exposure to the world’s fastest- growing gaming market.

Melco is selling 53 million American depositary shares on Nasdaq, to be priced between USD 16 to USD 18 each. Each ADS represents three ordinary shares, which currently trade for around HKD 22.

„The Nasdaq stock could perform better than the holding company, which could develop a holding-company discount as investors switch out of the Hong Kong-listed Melco International Development.“

According to analysts, Melco PBL Entertainment’s price-to-earnings ratio will be between 10.5 and 11.8 for 2009. This is noticeably lower than Macau- exposed Las Vegas Sands and Wynn, which have 2009 P/Es of 29 and 25 respectively. So aside from exposure to the world’s hottest gaming market, investors get a discount.

Analysts project the Melco ADS could go to USD 21 within 12 months.

What’s the catch? Melco has yet to generate any significant gaming revenues, has spent billions building its Macau casinos and is facing growing competitio: more projects from Sands and Wynn and a joint venture between Ho’s daughter Pansy Ho Chiu-king and Vegas operator MGM Mirage. Also, Galaxy has opened four casinos in the past year on Macau, including the massive StarWorld Hotel and Casino, with another planned for 2008.

Analysts worry that a squeeze on market share will become a problem if visitor numbers don’t keep up with casino capacity. Then, there’s location.

Peter Drolet, analyst at UOB Kay Hian Research, in Hong Kong, said: „Melco’s casino developments, when compared to its US rivals, look weak due to out-of-the-way locations. Wynn and LVS set up shop in the center of town, and are planning projects on the Cotai Strip.“ Cotai, which developers are trying to transform into their own version of the Vegas Strip, is expected to be a major draw for gamers.

Drolet notes that US investors may not apply a premium for Ho family connections, thus tempering the ADS‘ performance. Lawrence Ho Yau-lung is the chairman of Melco and son of Stanley Ho.

Also, fund managers are not convinced that buying Melco PBL gives you the best value for money. „It should trade at a discount multiple compared to Wynn and Sands because what investors like to see is growth, and opportunities in the Asian region for Melco PBL is constrained because it only has exposure to Macau,“ said Hayground Cove’s Ader.

Melco International has stated that Melco and PBL will evenly share the economic value and benefit of all projects in Macau and Asia.

Hong Kong-listed Melco International recently lost out to Genting International in a bid to build a mega- casino resort in Singapore, which legalized casino gaming last year. Its first casino site was awarded to Las Vegas Sands earlier this year.

Analysts expect other markets in Asia to soon follow Singapore’s change in attitude, in order to get their share of the cash generated in Asia on gaming.

Thailand, Japan and the Philippines are all possible candidates to legalize casino gaming in the coming years, say analysts.

As Matthew Jacob, an analyst at Majestic Research, observes: „Melco PBL is not necessarily constrained … outside of Macau, but Wynn and Sands have shown the ability to develop the kind of full-resort properties in Las Vegas and Macau which gives them an advantage of [the] longer track record these governments are looking for when choosing who will get future concessions.“

So for now, investors will have to take a leap of faith that Melco PBL will deliver fat shareholder returns. To do that, it will have to keep up with some serious competition.